The High Price Of Payments — And Innovation — In Travel

It’s that time of the year: crowded airports, missed connections, maybe the surprise of an upgrade (to stretch out those legs after sitting all day in meetings or at a holiday gathering). There is also the chance (please no, not this time) of some hassle with payments, such as the corporate account or card not going through, or maybe, on the travel agency side, a software glitch or another problem that adds friction and frustration to an already long travel day.

Payments costs $75 billion annually for the global travel industry, according to the new PYMNTS Travel Payments Study, an Amadeus collaboration, and 5.4 percent of global travel sales go toward paying third-party payment service providers (PSPs). However, despite all that money, the global travel industry is only now making what the research called the “first cautious steps into its own payment revolution.” Individual consumers are certainly driving many of those changes, but so are businesses that are eager to use the same cutting-edge corporate tools for travel that they use for other forms of B2B transactions.

Innovation Challenges

The challenges facing payments development in travel — while certainly not impossible to overcome — are substantial. Payments innovation, for starters, is an alien concept for many travel service providers, especially in the U.S. and Europe, which are often left to take lessons from payment advances in the Asia-Pacific region.

The PYMNTS-Amadeus research found that only 15 percent of all travel companies have attempted new payment innovations over the last three years, let alone succeeded. That’s not because travel agents and associated service providers lack imagination, nor is the travel industry ignorant of payment technology advances around the world (especially in China, a mobile payments and commerce leader).

It’s because travel industry participants are keenly aware of the costs of innovation — and its often uncertain prospect of returns. As the PYMNTS report put it, “Travel companies, in their inherently international field, understand that being innovative means managing a complex, multichannel and international system that supports not only global card brands and popular digital wallets, but also hundreds of local payment methods. In addition, they must protect customers from fraudsters, whose methods grow more sophisticated by the second.”

Innovation Willingness

As costly as hiring third-party payment service providers can be, building an in-house payments system represents even more expense and responsibility. That said, the global travel industry knows it must innovate to win over customers — as the report noted, international travel stands at record levels, and corporate travel accounts are a source of lucrative revenue.

The PYMNTS research found that 81 percent of travel companies plan to initiate “some” innovation projects within the next three years. A further 14 percent plan “a lot of new innovation,” while 5 percent have no plans for payments innovation during that time frame.

Corporate Push

Where is that spark for innovation coming from? Part of it comes from the corporate side of travel, according to a recent PYMNTS interview with André Siegert, global director of hotel finance and accounting at Kempinski Hotels, a luxury chain that operates 75 properties in 30 countries.

According to his view, companies have begun to use Alipay and other, newer consumer payment tools for corporate payments. In addition, regulatory pressure on credit card providers is increasing, providing another temptation to shift corporate payment policies in a variety of areas, including B2B travel. Businesses will not only strive to keep up more closely with payment changes (and ways to streamline payments and keep costs down), but will demand that their travel service providers innovate as well.

Those innovations, of course, usually come down to matters of cost — even when innovation is done to prevent customer loss, the question typically revolves around balancing the costs of those losses and new customer acquisition with the cost of innovation, the PYMNTS report said. According to the Travel Payments Study, 96 percent of travel companies view revenue from payments innovation as able to outweigh costs, a hopeful sign for an industry under so much pressure to adopt newer payment technologies and offer more payment options for both individual consumers and B2B travelers.

Large Firm Advantage

That advantage, as might expected, is more pronounced for larger travel firms, partly because of volume discounts they often receive from payment service providers. That, in turn, likely leads to more willingness among larger companies to innovate and experiment with payments. The research found that 39 percent of travel firms that anticipate cost savings from innovation have between $500 million and $1 billion of annual revenue. No company that earned more than $500 million in annual revenue expected for payments innovation to increase costs.

As for smaller companies, they “are less complex,” the PYMNTS report said, and, “therefore, believe they have less to gain when it comes to innovation.”

Cost Concerns

When it comes to cost and innovation, the challenge for many travel service providers is their high fixed costs, including for labor and capital. However, there is a way around that — deploying newer payment technologies, which have relatively lower costs and will often appeal to significant segments of the individual consumer and B2B travel markets, given the global nature of the industry.

Complexity, too, adds to costs. The biggest payment-related stress for the global travel industry, in fact, stems from “managing all aspects of payments from multiple PSPs,” according to the research. That complexity can increase when travel service providers stick too long with legacy payment systems, which then leads to various patches and other fixes, resulting in even more complexity. It can be a vicious circle if not managed well.

That does not stand as an impossible challenge, though.

The participants in the global travel industry need to keep a closer eye on payment and travel trends, as well as the technologies that are winning over consumers and corporates, and at what cost. Instead of a patch-it-up mentality, they can adopt a view toward innovation that seeks to invest something now to save more down the line — and to not only keep hold of current customers, but attract new ones as well.